Liquid investment: gold is a good hedge against inflation but pays no dividends. Photo: Reuters

Bull view: go on yellow

Few dispute that gold offers protection against inflation and debt crises. The metal cannot be printed at will and does not carry a risk of default.

Where opinions do vary – wildly – is whether or not we face the risk of such inflation or debt crisis.

The message today is that the Western economies are pretty  much under control again, the United States avoided its fiscal cliff,  and European officials assure us that the worst is over. But this is  public relations talk. During the 2008-09 global credit crisis, governments and central bankers were only able to save the global financial system with a radical programme of money printing and debt expansion.

One might ask, isn’t that how we got into so much trouble in the first place? Didn’t the West create asset bubbles and huge debt thanks to ultra-loose monetary policies?

The recent fiscal cliff debate was just a distraction from the real problem in the US: its out-of-control debt and unfunded liabilities add up to a staggering US$202 trillion, according to Laurence Kotlikoff, an economist. David Walker, former comptroller of the US last year  said the US was “two years away from where Greece was when it had  its crisis”.

The US is so broke that the Fed has to maintain money-printing policies if only to avoid a debt default. The same goes for most of Europe.

Beijing understands those issues well. China’s gold imports through Hong Kong for the year 2012 alone are expected to reach 800 tonnes, which is twice the country’s 2011 imports, and more than the entire Japanese central bank gold holdings of 765.2 tonnes.

Speaking of Japan, the country’s massive pension funds are also said to be thinking hard about shifting some money from super-low-yielding yen cash and bonds to gold, too, amid its government’s own moves towards printing money and deficit spending.

You don’t have to believe in the worst-case scenario to believe in gold. Gold will rise in price due to inflation pressures in a context of unrestrained government spending, central bank money printing, strong Asian demand and diminishing underground gold reserves. Meanwhile, a worst-case scenario – a sovereign debt default crisis – cannot be ruled out.

Gold prices hit a high in 2011 following a decade-long rally. Everyone knows why. The printing presses of world’s major economies (Japan, the United States and the euro zone) are running overtime as the world’s central bankers have taken on the job of rescuing everything, from banks to bonds to mortgages to moribund economies.

Gold has been attractive in this climate. The metal pays no yield, but its value does tend to rise in line with inflation.

Gold also serves as a hedge on total financial collapse. If you are worried that the world’s banks and economies are spinning into the abyss, then you might see a day when bank notes are worthless, and gold serves as the world’s only valid medium of exchange.

That’s a big, bold bet. Here investors are using gold not just as a way to beat inflation, but to make sure they have something with which to buy oats and fresh water when Armageddon arrives.

But I am told by some higher sense of economic order (my own intuition) that gold will tank when interest rates rise as investors see the financial system isn’t going to collapse, and that superior returns can be found in assets that actually add value. Think of an enterprise that is solving difficult issues ranging from improving health care in the mainland to reducing pollution in Hong Kong.

While we’re counting our investment profits, the gold bugs watch from the sidelines and wonder why they invested in a shiny yellow object with no essential value, which makes no profit and pays no dividends.

In fact, I have a sneaking suspicion that if you open the door to the barn behind the homes of some of the especially famous gold investors, you’ll find a couple of donkeys loaded up with pots and pans, ready to head to the farm where organic produce awaits.

For those of us without barns, we’ll continue to focus our investments on enterprises that are actually productive – that is, those that make life more comfortable or efficient.

To be fair, the gold bugs might be end up being correct. The entire financial system might go up in a ball of money-printing madness – Zimbabwe style. People might just give up on money and just barter for goods – in which case eBay might be a better investment than gold.

Robert Jones is head of FCL Advisory, which advises family offices and wealthy individuals

This article appeared in the South China Morning Post print edition as The bullion-dollar question